Mark Carney dropped hints of a rise in interest rates to stem likely above-target inflation while speaking at the London School of Economics last night.
Until now the governor of the Bank of England has been sanguine on the risk of inflation caused by a weakening pound as he viewed it as being muted by higher unemployment and a weaker economy following the Brexit vote.
But recent statistics on employment and economic growth have been robust and businesses are reporting increased input costs which economists expect will eventually be passed along to shoppers.
Mr Carney said that British consumers appear to be “entirely looking through Brexit-related uncertainties” as they continued to spend strongly, much of it driven by consumer borrowing.
He said the resilient economy was pushing the BoE to pay more attention to inflation and that there were limits to its tolerance for higher prices.
In November, the bank forecast the biggest sustained overshoot of its 2 per cent inflation target since it became independent in 1997. It predicted inflation would peak at 2.8 per cent in early 2018 before returning to target in 2020.
The bank’s monetary policy committee had warned in November there were “limits to the extent to which above-target inflation can be tolerated”.
Mr Carney said: "Recently, there have been signs of continued solid consumer momentum domestically and a stronger growth outlook globally.
"It remains the case that the outlook for inflation will depend on the evolution of the prospects for demand, supply and the exchange rate.
"Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2 per cent target."
Carney said balancing the impact of monetary policy on growth and inflation was difficult for “inflationary shocks” coming from changes in the exchange rate.
Following the speech, Sterling rose 0.6 per cent to $1.2115, sharply higher than the intraday low of $1.1979 in Asian trading 24 hours earlier. The low at the start of the week was the first time the pound had traded under $1.20 since October’s flash crash in sterling, a level it has not regularly traded at since 1985.
